To Curb Evasion, EU Report Calls For 2% Global Wealth Tax On Billionaires

Relevance: GS3 - Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment GS2 - Important International institutions, agencies and fora- their structure, mandate.

(Source: The Hindu, 10/23/2023)

Why in the news?

Recently, the Global Tax Evasion Report 2024 revealed that billionaires were using tax evasion to ensure that effective taxes paid by them equaled just 0 to 0.5% of their wealth and recommended a global minimum tax on billionaires equal to 2% of their wealth.

What is the Global Tax Evasion Report?

• The ‘Global Tax Evasion Report’ is compiled by the EU Tax Observatory, a research institution specializing in international tax matters, established in 2021.
• It represents the first systematic attempt to analyze available data in the field of taxation.

What has the Global Tax Evasion Report 2024 stated?

• Tax Evasion: Billionaires have been using tax evasion techniques to effectively pay tax rates as low as 0% to 0.5% of their wealth.
• Wealth tax: The EU Tax Observatory, which prepared the Report, recommended a global minimum tax on billionaires equal to 2% of their wealth.
  • This would help tackle evasion and generate around $250 billion from less than 3,000 individuals.
  • Although only a small amount of taxpayers would be affected, the tax rate of 2%) was justified as modest since the wealth of billionaires has grown at 7% a year on average since 1995
• On efforts to curb tax evasion: It found that over the last 10 years, the automatic exchange of bank information had helped reduce offshore tax evasion by three times.
  • Prior to this, 10% of the world GDP in financial wealth was placed in tax havens globally with the majority of it belonging to high net-worth individuals and not declared to tax authorities.
• Today, the equivalent of 10% of world GDP is found in offshore household financial wealth, but only 25% of it evades taxation.

What are the challenges to tax evasion identified by the Report?

• Lack of compliance by financial institutions: Some offshore financial institutions have been reluctant to comply with the requirement to automatically exchange bank information due to fears of losing their customer bases.
• These institutions do not face any significant threat of penalties from foreign tax authorities for noncompliance with tax regulations.
• This allows people to own financial assets in offshore accounts without reporting them.
• Loopholes in asset classification: High-net-worth individuals have shifted their holdings to categories of assets like real estate that are not covered under the agreement.
• The report recommends expanding the range of assets included under the system of automatic exchange of information.
• Greenwashing of the Global Minimum Tax: Although the global minimum tax of 15% on MNCs was expected to increase global tax revenues by 10% loopholes have been exploited to reduce expected revenues by a factor of 2.
• MNCs use green tax credits for low carbon transition to reduce their tax rates way below the minimum of 15%.
• Aggressive tax competition: The rise of preferential tax regimes targeting wealthy foreign individuals has significantly affected government revenues.
• The number of preferential tax regimes has increased from 5 to 28 in the EU and UK.
• They offer tax exemptions or reductions to incoming residents while preserving the general income tax schedule applied to domestic taxpayers.
• However, this weakens overall tax collection since adopting governments voluntarily forego tax revenues and inflict negative spillover effects on other countries.

New taxes introduced by the EU

• Global minimum tax: The EU has agreed to implement a minimum tax of 15% on big businesses which was approved at the G20 Leaders Summit in Rome in
  • This proposes to impose a minimum tax on corporate income in most countries and establish a two-pillar solution revising tax rules to address profit shifting and tax base erosion caused by tax evasion.
• Carbon border adjustment mechanism: The Carbon Border Adjustment Mechanism (CBAM) will be introduced in its transitional phase from October 2023.
  • It will levy a carbon tax on imports of products made from processes that are not environmentally sustainable or green.
  • It will impose a 20-35% tax on select imports into the EU from January 2026.
  • It is part of the “Fit for 55 in 2030 package" of the EU’s plan to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels
• Plastic tax: The EU has imposed a levy on non-recycled plastic packaging waste.
  • It is a contribution from the Member States to the EU, based on the amount of non-recycled plastic packaging waste produced by each member state.
  • It is expected to generate an additional revenue of 6-8 billion Euros for the EU every year.
• Energy Taxation Directive (ETD): It is the EU’s framework for the taxation of energy products including electricity, motor, and most heating fuels.
  • It aims to encourage a low-carbon economy by widening the tax base and introducing tax rates based on the energy content and environmental impact of energy products.

Steps taken by the government

• India is a signatory to the Inter-Government Agreement (IGA) on the Foreign Account Tax Compliance Act (FATCA) with the USA.
• In 2015 India signed a Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information.
• In the Budget 2016, an equalization levy was introduced on payments exceeding ₹1 lakh to online ad services from non-resident entities.
• India introduced Country-by-Country reporting requirements through the Indian Income Tax Act, 1961 through the Finance Act 2016.
• India is a signatory to the agreement for the exchange of country-by-country reports with the US to interchange reports filed by multinational enterprises in respective countries.
• The Patent Box tax regime was implemented in India by the enactment of the new Section 115BBF in the Finance Act of 2016.
• The Government has established the Tax Administration Reform Commission to undertake fundamental reforms to tax concerns in order to simplify and streamline tax procedures.
  • Previously, India established a number of committees, including the Taxation Enquiry Committee, the Indian Tax Reforms Committee, and the Direct Taxes Enquiry Committees, among others.
• The Finance Bill introduced the Transfer Pricing Audit to audit concealed transactions in order to combat tax avoidance.

Conclusion

• Tax evasion is a major concern faced by countries since taxes make up a vital source of revenue for their governments.
• Ensuring proper tax compliance will help improve the health of the economy but it is constrained by the lack of compliance and loopholes in the laws.
• Therefore, the imposition of a global minimum tax can act as a universal tool to tackle tax evasion and prevent the erosion of government revenue.

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FAQs

MCQs

Question: The term ‘Base Erosion and Profit Shifting’ is sometimes seen in the news in the context of (UPSC CSE 2016)

(a) mining operation by multinational companies in resource-rich but backward areas

(b) curbing of the tax evasion by multinational companies

(c) exploitation of genetic resources of a country by multinational companies

(d) lack of consideration of environmental costs in the planning and implementation of developmental projects